Trendspotting: June 2021

According to the recently announced 2021-22 budget, the economy is supposed to have grown by 6.1% in the 2020-21 financial year. In contrast, the Asian Development Bank is more bullish, with a growth forecast of 6.8%, while the World Bank is far gloomier, projecting only 3.6% growth for the year.

Our charts suggest that there are positive signs, but also grounds for caution.

The most significant positive changes in the last three months are:

—   imports growing by 11% in the year to March 2021;

—   tax revenue growing by nearly 7% in the year to April 2021;

—   remittances continue to grow; and

—   over 90,000 workers left for overseas in March-April.

However, the recovery is far from guaranteed, as:

—   electrical generation remains low;

—   there is very minimal growth in industrial production;

—   there is minimal growth in exports; and

—   credit to private sector is still slowing down.

Importantly, these indicators do not fully take into account the pandemic wave of April-May.

Overall assessment

Bangladesh economy, already slowing before the Covid-19 recession, is yet to show any sign of a durable growth. That said, there were flickers of recovery in some indicators. Production as well as household demand appeared to have bottomed out by March-April (that is, before the latest lockdowns). Labour income appeared to be recovering, and food prices were stabilising towards the end of 2020. Policies are supportive of growth. Stock market appears to be optimistic.

Charting Progress 5 – Openness

The Liberation of War on 1971 was not just one of the worst humanitarian tragedies of the 20^th century, it also left significant material footprints. Average incomes fell by about a fifth in what was already one of the most impoverished places on earth. Pre-war income levels wouldn’t be reached until the early 1990s. Since then, however, average incomes have tripled, significantly reducing poverty along the way.

Over time, sustained rises in income reflect either a growing pool of workers, or the average worker becoming more productive. The progress notwithstanding, Bangladesh has significant unfulfilled potential. Millions still remain outside the formal labour market, and the average Bangladeshi worker in industry and services sectors remain far less productive than their peers in Southeast Asia.

Countries that are open to foreign trade and investment tend to create more jobs, and their workers tend to be more productive. On both counts, Bangladesh is behind Southeast Asian neighbours.

Money is no problem?

The central bank is a key institution in the modern economy. Its function is to maintain stability in the macroeconomy and the financial system. In the advanced capitalist world, macroeconomic stability has come to mean maintaining price stability while growing the economy as close to its potential pace as possible. In addition to these, for a developing economy, macroeconomic stability could also mean exchange rate stability or maintaining solvency of the government. Financial system stability means maintaining a functioning banking system, keeping the credit flowing, and acting as the lender of the last resort.

During the COVID-19 pandemic, central banks around the world have had to balance all these tasks, and the Bangladesh Bank is no exception. In its latest Monetary Policy Statement, issued for 2020-21 financial year, the central banks states that —monetary policy stance monetary programs for FY21 are essentially expansionary and accommodative for all growth support needs without impairing attainment of the targeted inflation containment.

With inflation hovering around 5-6% (Chart 1) and expected to remain moderate into the foreseeable future, supporting economic growth has, quite rightly, been the central bank’s focus.

Has money been a problem for the economy during the pandemic?

The price of everything

There is a major difference of views among the official prognosticators about Bangladesh’s economic recovery from the pandemic recession. The 2020-21 Budget projected return to 8% GDP growth in the current financial year, while the World Bank doesn’t see even 4% growth in next financial year, with the IMF and the ADB being somewhere in between. No such difference, however, when it comes to inflation projection. All three international financial institutions expect inflation to hover around 5.5-6% range over the forecast horizon, not too dissimilar to the 2020-21 Budget (Chart 1). 

Further, thus far, actual inflation has remained very much within that range (Chart 2, source: CEIC Asia database). Contra fears, food price inflation, while experiencing a modest uptick, remains moderate compared with the rates experienced in 2013 or 2017. Globally, food and energy prices remain low. As Tyler Cowen, an American economist, puts it: It is not likely that the next major macroeconomic problem will be inflation. 

Nothing to worry about inflation then?

Well, maybe, but…..

The shape of recovery

As the wintry chill replaces the late autumn, the pandemic continues to claim more and more victims across the northern hemisphere. With or without former lockdowns, economies continue to struggle. Possible good news about vaccines notwithstanding, a recovery doesn’t seem imminent. Forecasts made merely a few weeks ago, thus, appear to be already obsolete. Nonetheless, it is worth paying attention to three recent reports by the IMF, the World Bank, and the Asian Development Bank, not because of their projections as such, but the analysis underpinning them.
That is, in what follows, the focus shouldn’t be on the numbers, but the narrative. And a quick recap of the alphabet soup of the shape of recovery would be a good place to start.

The most optimistic narrative is of the V-shaped recovery, which holds that there is nothing fundamentally broken with the economy, and as the pandemic ends, activities will be roaring back, along with jobs and income. A less rosy, but still optimistic story is the U-shaped recovery, which is similar to the V in terms of a rapid rebound, but the trough is lower and longer. Then there is the W-shaped case, where an initial rapid recovery is likely to be followed by another sharp deterioration in case of further lockdowns. The most pessimistic one is the L-shaped trajectory, whereby the economy does not actually recover to the pre-pandemic growth path into the medium term — essentially, the pandemic lays bare the existing problems in the economy or scars enough sectors in a way such that growth remains slow even when the pandemic is over.

The 2020-21 Budget is predicated on a V-shaped recovery, whereas the World Bank is in the L-camp, with the ADB and the IMF being somewhere in between (Chart 1 —all reported in financial years).

Six billion dollars, man!

Just as the COVID-19 leaves the survivors emaciated, so is the pandemic leaving public finances significantly weakened.  With economic activities being halted, government revenues are falling short of what had been budgeted.  Meanwhile, governments are spending additional sums to support the health sector as well as workers and businesses more broadly.  As result, budget deficits are widening, and public debts are rising.  

Bangladesh is no exception.  According to the IMF, budget deficit for 2020 is likely to be 6.8% of GDP, compared with the 3% it projected a year ago.  The debt-to-GDP ratio for 2020 is now expected to be 40%, cup from last October’s projection of 35%.  However, as shown in the charts below (source: IMF), the impact of the pandemic on public finances is expected to be less severe in Bangladesh than in many of its South and Southeast Asian neighbours.  

That said, the IMF is expecting a worse fiscal outlook than what Bangladesh government budgeted for in June — the official figures show a budget deficit of 6% of GDP in 2020-21 fiscal year.  This reflects IMF’s assessment that economic recovery is going to be much weaker than a return to the 8% growth underpinning the budget. 

What does the scenario analysis we have been considering over a number of posts imply for debt dynamics?

Debt pool

…. [T]here are known knowns…  known unknowns …. also unknown unknowns  — quipped the American Secretary of Defense Donald Rumsfeld in the lead up to the Iraq War.  When it comes to the economic ramifications of the COVID-19 pandemic, the only thing we know for sure is that we don’t know how things are likely to play out. 

Pause here for a moment so that this sinks in.  We can never know the future, no forecaster is a prophet and no prediction is certain, but usually there is an appreciation of which scenarios are more or less likely than others.  For the post-pandemic economic outlook, however, even that kind of probabilistic analysis is difficult. 

This uncertainty heightens the importance of scenario analysis.  Specifically, suppose the economic growth turns out to be much weaker and inflation slightly higher than the government’s budget forecasts , along the table below:

The official budget forecasts are for the the nominal GDP — that is, the value of all economic activities in a year without adjusting for inflation — to grow by over 15% a year during 2019-22.  During the same time, revenue is expected to grow by nearly 20% a year, implying an elasticity of revenue to GDP of nearly 1.3 — that is, each 1% rise in nominal GDP is expected to result in a 1.3% increase in revenue. 

In the alternate scenario being analysed, nominal GDP grows by over 9% a year during 2019-2022.  The weaker economy means less revenue than that projected at the Budget — by 488 billion taka in 2020-21 and nearly 495 billion taka in 2021-22.  To put that in the context, expenditure on pay and allowances of public servants was 534 billion taka in 2018-19, and 500 billion taka is about a quarter of the annual development budget in 2020-21.

Faced with this revenue shortfall, what could the government do? 

Raising taxes while the economy is already sluggish is neither sensible economic policy nor plausible politics.  The same goes for large cuts to the public service.  In fact, there might be a need for more government expenditure: households might need to be supported through either cash payments or public relief operations that provide food and other necessities; businesses might ask for bridging loans or other forms of assistance, merits of which would have to be carefully considered; and in the worst case scenario of deglobalisation and prolonged global slowdown, Bangladesh’s low cost manufacturing dependent growth model might become unsustainable, and the government might need to consider policies to ‘build back better’.  Cutting annual development expenditure might cover a 500 billion taka revenue shortfall in 2020-21, but that’s not a sustainable strategy if the recovery proves illusive beyond this year.

The budget is already expected to be in red by 1900 billion taka (6% of GDP) in 2021 financial year.  With a weaker economy and revenue shortfall, budget deficit could blow out to nearly 8% of GDP (chart below).   

How could this extra deficit be financed?  What would be the consequence for public debt? 

Where to find 500 billion taka?

That the COVID-19 pandemic is as much an economic crisis as it is a health crisis is no longer news.  According to the 2020-21 Budget, economic growth for 2019-20 was expected to clock at 5.2%, a full 3 percentage points downward revision from what was expected in June 2019, and much slower than the 7.4% a year pace recorded in the five years to 2018-19.

There is, however, considerable difference of views about the timing, pace, and visually, the shape of the recovery.  The Budget forecasts a V-shaped recovery where the pandemic will have ended presently, and the economy will grow by over 8% in 2020-21 and 2021-22.  International organisations are less optimistic.  For example, the World Bank expects an L-shaped recovery where the economy not only slowed sharply in 2019-20, but the slowdown persists into the next couple of years.  Back in April, the multilateral development bank expected real GDP growth of around 3% in 2019-20 and 2020-21, still not reaching 4% in 2021-22.  Their latest forecasts are even more pessimistic.

With the global pandemic yet to show any sign of ending, and the science and logistics of a vaccine still uncertain, it is useful to do a simple scenario analysis — what would be the fiscal impacts if the recovery reflected the World Bank’s April guesses instead of the official Budget projections?  The table below sets out the scenario that was analysed couple of weeks ago.

Some back of the envelope calculations suggest that if the scenario were to materialise, the government might be facing a revenue shortfall to the tune of nearly Tk500 billion a year (Tk488 billion in 2020-21 and Tk495bn in 2021-22, to be precise).

How could the government make up for such a revenue shortfall?

Corona Budget: the Long View

The public discourse around the budget in Bangladesh is limited to a few days in the middle of June when news outlets parrot the government talking points, and a handful of critics recycle the same arguments — that the budget is unrealistic (if not based on false data) and not pro-poor enough (if not actually enabling the rich to become richer through massive public corruption).  Remarkably, hardly anyone ever mentions the medium term macroeconomic policy statement (MTMPS) — the most important document released by the government every June.

I wrote very similar words a decade ago, in the Daily Star Forum.  Along with fellow Drishtipat writer Syeed Ahamed who used to pen a piece titled Budget: the good, the bad, and the uncertain, the July issue of the Forum would print the Long View where I would analyse the MTMPS (yes, an ugly acronym if there ever was one — must have been an econocrat who came up with it!).

Much water has flown through our delta over the years since both Drishtipat and the Forum ceased to exist.  But a few things remain unchanged: the government still publishes the MTMPS in the Ministry of Finance website; hardly anyone talks about it; and the budget discourse is still same as it was then, albeit done more in Facebook than anywhere else.

The Statement typically begins with a summary of the key budget announcements, before providing a detailed analysis of the macroeconomic projections — how fast the economy is expected to grow, driven by which sectors, and what that means for external balances or inflation, and ending with a fiscal analysis — expenditures, revenues, deficit and its financing, and the dynamics of public debt.  Interesting side note: the current Secretary of Finance, Abdur Rouf Taluqder, led the team that put together the country’s first MTMPS in the mid-2000s.

Published in the midst of the most severe economic crisis in over four decades, the importance of this year’s MTMPS is self-evident.  The document is internally consistent — that is, the fiscal outlook is consistent with the macroeconomic narrative.  Of course, it would be an understatement to say that there is considerable uncertainty around the macroeconomic outlook.  The truth is, no one know when and how the world will recover — when and how the pandemic will end, what and how the society will adjust to, and therefore how fast the world economy will grow by when: no one has any answer to these questions.

As such, any quibbling over the numbers in MTMPS is completely besides the point.  Much more important is that the Statement has no scenario analysis — what if the world does not evolve the way Mr Taluqder’s talented team expects it to?

This is not a rhetorical question.  The Statement is based on the IMF’s World Economic Outlook from April 2020, which projected the world economy to contract by 3% in 2020 on the assumption that the pandemic would end in the first half of the year.  Judging that this assumption was no longer tenable, the Fund updated its forecasts in June — the world economy was now projected to contract by 4.9% in 2020.  Emerging and Developing Asia, of which Bangladesh is a part, was now expected to contract by 0.8% in 2020, compared with a 1% growth forecast in April, with the downward revision reflecting a worsening pandemic.

The IMF revisions alone might render the MTMPS less-than-credible!

It is regrettable that risks and uncertainties aren’t explored at all in the Statement, as some back of the envelop calculations show that the government could well face some difficult choices in the coming years.

Hungry times

For most people, macroeconomic indicators are gobbledegook — what does the difference between 5% and 8% GDP growth mean?  For most people, economic indicators that matter are the ones that animate dinner table conversations — jobs and incomes, and the cost of living.  In the advanced economies with higher quality data, it is jobs numbers that resonate most — one might not understand what GDP stands for, but it is very clear what a rise in the unemployment rate means if one’s neighbour has been laid off.

In developing economies with large informal sectors, however, quality employment numbers are hard to come by in real time.  Data on the prices of essentials — proverbial chaal, daal, tel, noon — are much more readily available, as are wage rates of different types of workers.  Mix those essentials and voila, there is a plate of khichuri.  Using the data on prices and wages, we can calculate the number of plates of khichuri an average worker could afford a day.